Tax Compliance for US Expats

Approximately nine million people from the United States live overseas. This figure was released by the Department of State in 2016 as the closest estimate at the time. The number increases constantly, and the total number of US expats is likely to be in excess of nine million in 2019.

Many US expats have little to no knowledge of their tax obligations to the US and are therefore non-compliant without realising it. It’s not always understood, for example, that the US is one of just two countries in the world (the other being Eritrea) that requires all US citizens to file a US tax return every year. This includes US citizens and green card holders who are living in a different country. It doesn’t matter where you live or what you’re doing, as a US expat you must ensure you are tax compliant by filing a return on your worldwide income.

Tax compliance rules for US expats

For US expats previously unaware of their tax liability to the US Government, the discovery can be anxiety inducing. Some may simply be unaware because the majority of countries tax their citizens differently. Others may assume a tax treaty means they don’t need to file with IRS as well as their country of residence. Yet others may be concerned they have a backlog of unfiled taxes going back years, and that they may therefore face penalties should they now file with the IRS.

However, this is not necessarily the case. Most US expats can achieve tax compliance with the IRS without paying any money to the US taxman.

Requirements for US expat tax compliance

If you are a US expat you must file the same tax return form (1040) as American citizens living in their home country. Expats have an automatic extension on the usual filing date of 15 April. You have up until 15 June to file Form 1040, without needing to apply for it. If this isn’t enough time, you can apply for another extension until 15 October.

These filing extensions exist so that US expats can file foreign taxes first. You must prove you have done this when you file the US return, as you can claim Foreign Tax Credit (FTC). This credit allows you $1 dollar for dollar credit on tax you’ve already paid to the country you’re living in.

How do US expats qualify for Foreign Earned Income Exclusion (FEIE)

US expats can also apply for FEIE, which has a threshold of $105,900 for 2019. This amount changes every year in line with inflation. This enables you to exclude some or all of your income earned from the foreign country (both from self-employment and wages) from being taxable. To qualify, you must prove you live and work outside the United States by taking the Physical Presence test or the Bona Fide Resident test:

  • Bona Fide Resident test requires you to prove you are resident in another country, either because you have official status, are paying taxes or have a permanent home there.
  • Physical Presence test means you must physically live in another country for at least 330 days in a 12-month timeframe. It’s important to note that travelling times don’t count in this, and a whole day constitutes a full 24 hours.

Claiming FEIE is not automatic, so as a US expat you must file Form 2555 along with your federal tax return form. US expats may also be required to report investment accounts and foreign bank accounts by filing an FBAR (Foreign Bank Account Report).

Expert assistance is necessary

For US expats to achieve tax compliance, there’s no doubt it’s a more complex endeavour than for US citizens living in America. There are more requirements for reporting, and it’s necessary to identify, understand and file appropriately for the best exemptions to lessen the US tax liability.

Even those of you who feel your finances are simple should seek expert advice. There are various measures that could catch a US expat out if you don’t fully understand your liability. For example, if you have $400 worth of income from self-employment, you must file a tax return but also may possibly have to pay US social security taxes. It’s possible you could claim under a Totalisation agreement, but this depends on which country you live in and the agreement between the US and that particular country.

These are the kinds of complications that are not well understood, or even known about by many US expats – let’s face it you’re probably more focused on establishing your life and work overseas.

What if US expats are behind in filing taxes?

If you are a US expat worried that you are too far behind with US tax returns, or FBAR filings, you should not allow this to impede your move towards compliance. There is an amnesty programme initiated by the IRS to smooth the process, called the Streamline Procedure.

Under this, US expats can file the last three tax returns and the last six FBARs if necessary. You must also declare that your previous failure to file these was due to a lack of knowledge of liability, rather than a wilful decision. This allows you to escape penalties for non-compliance.

Engaging a US tax specialist consultant, such as Ingleton Partners, as a US expat you can be assured you will achieve compliance. You can also have the peace of mind of knowing that your US taxes are being managed in the best way, and that all steps are being taken to ensure exemptions where possible.

Tom Griffiths

Tom is a member of the Association of Tax Technicians in the UK, an Enrolled Agent admitted to practice before the Internal Revenue Service and a member of the National Association of Tax Practitioners in the US. He is a specialist in the UK and US tax implications for individuals and in particular those who have interests in partnerships, corporations or trusts. Tom has a wealth of experience in private client tax issues and he previously practised at PwC, KPMG and Grant Thornton.